Investment in credit risk…risky or profitable?

What are credit risk funds?

Credit risk funds are debt funds that invest a minimum of 65 per cent in corporate bonds and debentures rated below AAA. These funds also invest a small part of their corpus in government securities and T-Bills to provide liquidity in case of heavy redemptions.

What is their investment strategy?

These schemes follow accrual strategy. They invest in low-rated securities with strong fundamentals, hoping for a rating upgrade in future. These schemes hold the securities till their maturity

Are these schemes risky?

A default or a downgrade in rating of the scheme’s portfolio holdings may hit the net asset value of the scheme badly. The past, multiple schemes of AMCs were hited  badly due to rating downgrade of papers held by their schemes.Check the portfolio regularly to ascertain whether the scheme is investing more in low quality instruments or the one which have high credit rating. It will help you to reduce the credit risk.

How should investors choose a credit-risk fund?

Financial planners advise investors to choose large-sized funds in this category. Higher assets give the fund manager better scope to diversify and spread risks. Investors should also look at a fund with a lower expense ratio .

To know more about credit risk fund and which are the performing funds click here

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